Before MAJOR, Chief Judge, and FINNEGAN and LINDLEY, Circuit Judges.
This is a petition to review a decision of the Tax Court which sustained the action of the Commissioner of Internal Revenue in determining a deficiency in petitioner's personal income tax for the taxable year 1943. By reason of the provisions of the Current Tax Payment Act of 1943, the taxable year of 1942 is also involved, with a deficiency determined against petitioner upon the same basis as that employed for the year 1943. The Commissioner's determination resulted by adding $1,817.00 for the year 1942, and $1,864.00 for the year 1943, to the amount of income reported by petitioner for those years.The Commissioner in his notice of deficiency explained the additional income for 1942 as follows: "Your taxable income for the year 1942 has been increased by the amount of $1,817.00. It is held that the above amount, which consists of premium payments made by Leon Mandel, your former husband, on life insurance policies, in which you have a beneficial interest, constitutes taxable income to you." The same explanation was given by the Commissioner for increasing petitioner's income for the year 1943, in the amount of $1,864.00.
The additions to petitioner's reported income for the years in question were made under § 22(k) of the Internal Revenue Code, Title 26 U.S.C.A. § 22(k), which provides, so far as here relevant: "In the case of a wife who is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, periodic payments * * * received subsequent to such decree in discharge of * * * a legal obligation which, because of the marital or family relationship, is imposed upon or incurred by such husband under such decree or under a written instrument incident to such divorce or separation shall be includible in the gross income of such wife * * *." We also note that § 23(u) of the same Revenue Code provides for deductions from gross income, "In the case of a husband described in section 22(k), amounts includible under section 22(k) in the gross income of his wife, payment of which is made within the husband's taxable year."
The deficiency determined by the Commissioner against petitioner was challenged in the Tax Court, with a decision adverse to petitioner, from which the review comes to this court. As is obvious from what has been said, the question for decision is whether the Tax Court erred in holding that life insurance premiums paid by petitioner's former husband in 1942 and 1943, in conformity with a separation agreement between the parties, constitute taxable income to petitioner as alimony paid to her under the provisions of § 22(k).
Petitioner and her former husband, Leon Mandel, were married April 30, 1924, and separated in August, 1932. Two children were born of this marriage, Noel, February 8, 1927, and Leon, July 31, 1928. On November 29, 1932, petitioner and her husband entered into a written agreement incident to divorce proceedings, which culminated on December 29, 1932 in a divorce decree. At the time of the separation agreement both petitioner and her then husband were thirty years of age, one of the children was five and the other four years of age. On January 27, 1946, petitioner was married to George Seligmann. (We shall continue, however, to use the term "husband" as meaning petitioner's first husband, Leon Mandel.)
The separation agreement entered into between petitioner and her husband covers some twenty-three pages of the printed record, and we see no necessity to burden this opinion by setting it forth verbatim. Paragraph 4 is principally involved in the instant proceeding. Prior to a consideration of that paragraph, a sketchy statement of other provisions may be of some pertinency. The agreement makes detailed provision for the care, custody, control and maintenance of petitioner and the children, among which is the husband's agreement to pay petitioner during her life $18,000.00 per annum in equal monthly installments for the support and maintenance of petitioner and the two children, with numerous conditions attached, including a reduction in the annual amount to $10,000.00 in the event of petitioner's remarriage. In a proceeding instituted by the husband, it has been judicially determined from a consideration of the provisions of the separation agreement as a whole that $8,000.00 of these annual payments should be treated as alimony received by the instant petitioner within the purview of § 22(k). Under this ruling the husband was entitled under § 23(u) to a deduction from his income in the amount of $8,000.00, rather than in the amount of $18,000.00, which he claimed. See Mandel v. Commissioner of Internal Revenue, 7 Cir., 185 F.2d 50, affirming the Tax Court memorandum decision on said issue. By reason of this ruling petitioner has included in taxable income reported the sum of $8,000.00. The Tax Court also determined, as shown by the same memorandum, contrary to the contention of the Commissioner, that the insurance premiums paid under paragraph 4 of the agreement (those presently in issue) were deductible by the husband under § 23(u). The Commissioner sought no review on this point.
The agreement in its broad aspects provided for the creation of a trust fund, partly during the lifetime of the husband and partly at his death, in the amount of $300,000.00, with a designated trustee, for the benefit of petitioner and the children after the death of the husband, subject to certain conditions set forth in the agreement. The contributions to the trust fund were to be made in the following manner:
(1) As provided in paragraph 5, the husband was required to deposit with the trustee mortgage bonds in the par amount of $100,000.00, which was done.The income received from such bonds by the trustee was to be paid to the husband during his lifetime, with the proviso that if the husband survived petitioner and the children (and the descendants of the children) the said bonds were to revert to the husband as his absolute property. It was also provided that the trustee might use the income from such bonds to make good any default by the husband under the agreement, including that of the husband's obligation to pay the annual premiums upon the policies of insurance referred to in paragraph 4 (the payments here involved).
(2) The husband was required to make a bequest in his will of $100,000.00 cash payable to the designated trustee, the income from which was to be distributed by the trustee under the same terms and conditions as were designated for the distribution of other income arising from the trust.
(3) This brings us to paragraph 4, the provisions of which give rise to the instant controversy. By this paragraph the husband was required to and did deposit with the trustee two ordinary life insurance policies on his life in the aggregate face amount of $100,000.00. The designated beneficiaries in these policies were changed to the trustee. It was provided: "In the event of the husband's death, the proceeds of the policies shall be retained by the insurance company upon the following conditions: The entire income of said principal sum shall be paid to the wife during her lifetime so long as she is not remarried.While the wife is remarried, the income shall be paid in equal parts to the wife and the surviving children or child or the issue of the children, per stirpes, and upon the wife's death, said principal and all accumulations shall be paid to the children or their survivor in equal parts or to their surviving issue, per stirpes. If, while the wife is remarried, no children shall survive the wife, or in the event that while she is remarried, both children shall be deceased, then one-third (1/3) of the income shall be payable to the wife for her life, and the balance of the income shall be paid as the husband may by his last will and testament direct, or, in the absence of such direction, to the heirs at law of the husband as they would be determined under the statutes of the State of Illinois concerning the devolution of personal property as the same is now enacted, and after the wife's death, the principal and all accumulations shall be paid as the husband shall direct by his last will and testament, and, in the absence of such direction, to the heirs at law of the husband as above defined."
It was also provided that in the event of the death of the husband after that of the wife, the proceeds of said policies when collected should be divided equally between the two children or, if they should both be deceased without having left any issue, "then the proceeds shall be paid as directed in the last will and testament of the husband, and, in the absence of such direction, to the heirs at law of the husband in the proportion in which they would take under the statutes of the State of Illinois concerning the devolution of personal property as is now enacted." And it was provided that in the event of petitioner's death and that of both children without leaving issue surviving either of them, prior to the death of the husband, the policies held by the trustee should upon demand be delivered to the husband, as and for his absolute property, free and clear of the conditions and limitations imposed by the trust. Finally, it was provided, "The husband agrees to maintain said policies of insurance so long as either the wife or the children or their survivor or any of the issue of the children shall be alive, and to pay the premiums hereafter from time to time becoming due on said insurance policies, in apt time * * *."
In compliance with the obligation lastly stated, the husband in the year 1942 paid premiums in the amount of $1,817.00, and in 1943 premiums in the amount of $1,864.00. It is these payments by the husband upon which the Commissioner has determined deficiencies in the petitioner's income for those two years on the theory that they were "periodic payments" of alimony by the husband to the petitioner and, therefore, constituted income to her under § 22(k).
We are aware of no case where a court of review has considered whether the payments of insurance premiums by a husband for the benefit of the wife were alimony payments and, therefore, income within the meaning of the relevant section. There are a number of cases which have been before the Tax Court and the Courts of Appeals relative to a husband's right to deduct such payments under § 23(u). Those cases have turned largely on the issue as to whether the policies of insurance upon which such premiums were paid were deposited as security for the performance of a separation agreement. If so, they were held not to be deductible. Blumenthal v. Commissioner, 13 T.C. 28, affirmed, 3 Cir., 183 F.2d 15; Carmichael v. Commissioner, 14 T.C. 1356; Gardner v. Commissioner, 14 T.C. 1445, affirmed, 6 Cir., 191 F.2d 857; Baker v. Commissioner, 17 T.C. 1610, affirmed, 2 Cir., 205 F.2d 369. On the other hand, if the policies were not deposited for security purposes and the premium payments were for the benefit of the wife, they have been held to be deductible by the husband. Stewart v. Commissioner, 9 T.C. 195; Estate of Hart v. Commissioner, 11 T.C. 16, and Carmichael v. Commissioner, supra. It is conceded here, as it was before the Tax Court, that the premiums paid by the husband under paragraph 5 of the agreement did not constitute alimony payments to petitioner for the reason that under the terms of that paragraph the policies were deposited for security purposes.On the other hand, it is argued by the Commissioner that the policies described in paragraph 4 (those in issue) were not deposited for that purpose and, hence, premiums paid thereon constituted alimony payments ...